Naira’s Fall to N1,482/$1 in NAFEM suggests A Move for Convergence by the CBN

In a surprising turn of events on Tuesday, the foreign exchange market experienced an unusual occurrence as the naira reached N1,482/$1 on the Nigerian Autonomous Foreign Exchange Market (NAFEM). 

This marked a significant increase compared to the parallel market rate, which remained anchored at N1,460/$1, maintaining the rate from the previous day.

The official NAFEM window, which closed at N1,482.57, reflected an N133.95 loss or a 9.94 percent decline from the previous rate of N1,348.62. This shift in the exchange rates has caught the attention of market participants, prompting speculation about the central bank’s potential move towards the convergence of the naira.

Data from the Financial Markets Dealers Quotations (FMDQ) website revealed a notable increase in daily turnover, reaching $72.33 million on Tuesday, a 12.50 percent rise from the $64.29 million recorded on Monday. The spot rates recorded for the day ranged from the highest at N1,531/$1 to the lowest at N789/$1, indicating increased volatility in the market.

The drastic fall in the exchange numbers in NAFEM indicates a possible devaluation for the naira’s convergence by the CBN especially considering that the official rate has been dangling around N890 per dollar.

Mrs. Hakama Sidi-Ali, the Acting Director of the CBN’s Corporate Communications Department, said on Monday that the apex bank has implemented reforms to streamline and unify multiple exchange rates, foster transparency, and reduce arbitrage opportunities.

The Lagos-based FMDQ said in a notice to financial market operators that the change to the pricing methodology “aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange.” The measures will ensure “rates accurately reflect market conditions while upholding price formation and transparency,” it said.

The central bank has for long been pointing accusing fingers at speculators, whom it believes their report of inaccurate figures is impacting the naira’s performance in the FX market.  

“The NAFEX [NAFEM] fixing and closing rates were weighed down by trades going through at off-market levels’” Samir Gadio, head of Africa strategy at Standard Chartered Plc told Bloomberg. “What is clear at this point is that these off-market trades are not factored in anymore, hence the jump in NAFEX.”

In a circular published Monday, the CBN said it had become aware of traders reporting “inaccurate and misleading information,” including under-reporting of transaction pricing, which affected the exchange rate.

“Deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will henceforth face sanctions,” the central bank said. It added that it is “committed to a well-functioning and transparent market” conducted on a willing buyer, willing seller basis, with prices quoted and displayed transparently.

While the CBN has not commented on the strategy shift, analysts have faulted the idea that speculators are responsible for the naira free.

“Blaming speculators for falling Naira is like Arsenal fans blaming Man City for Arsenal not winning the league last season,” Kalu Aja, a financial analyst humorously said.

Analysts say the answer to Nigeria’s FX crisis is tied to adequate liquidity of the dollar, to fill the gaps orchestrated by the scarcity – such as Nigeria’s inability to fulfill its financial obligations involving matured FX forwards with banks and repatriation of trapped revenue of multinational companies operating in Nigeria.

The central bank said it recently released $500 million, targeting the backlog of verified foreign exchange transactions spanning various sectors. This latest action comes on the heels of an earlier payment of approximately $2.0 billion to settle outstanding commitments in crucial sectors such as manufacturing, aviation, and petroleum. This includes payment of $61.64 million to members of IATA, who have more than $700 million in earnings trapped in the country.

.@cenbank has released $64.44m in blocked #airline funds??however $700m remains with #Nigeria’s commercial banks ?

The devaluation of the Nigerian Naira against the US dollar is a concern. #Airlines shouldn't be penalized by the lower exchange rate. https://t.co/GkkqzOOnvm pic.twitter.com/OSbiNOIeoO

— IATA (@IATA) January 30, 2024

While the depreciation has been “very significant,” dollar supply from the central bank will need to improve for the naira to stabilize or even strengthen, Gadio said. Currency inflows from portfolio investors would follow, further supporting the naira, once short-term interest rates rise significantly, he added.

Investors have reportedly expressed doubt about Nigeria’s foreign reserve, said by the CBN to be around $33 billion. They argue that if the amount of the foreign reserve is correct, the nation will not be struggling to repatriate funds to multinational companies. 

The CBN said last year that it’s looking to secure $10 billion to clear Nigeria’s FX backlogs, which the Minister of Finance Wale Edun has fingered as a major contributor to the FX crisis.

The new CBN directive on foreign currency exposure; download here.